535:. Counter-party diversification saw the largest flows of client assets out of Morgan Stanley and Goldman Sachs (the two firms who had historically had the largest share of the business, and therefore had the most exposure to the diversification process), and into firms which were perceived, at the time, to be the most creditworthy. The banks which captured these flows to the greatest degree were Credit Suisse, JP Morgan, and Deutsche Bank. During these market changes, HSBC launched a prime brokerage business in 2009 called "HSBC Prime Services", which built its prime brokerage platform out of its custody business.
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459:-based product, although various prime brokers did supplement their core equities capabilities with basic bond clearing and custody. In addition, prime brokers supplemented their operational function by providing portfolio reporting; initially by messenger, then by fax and today over the web. Over the years, prime brokers have expanded their product and service offerings to include some or all of the full range of fixed income and derivative products, as well as foreign exchange and futures products.
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portfolio reporting, consolidated cash management and other services. Fundamentally, the advent of the prime broker freed the money manager from the more time consuming and expensive aspects of running a fund. These services worked because they also allowed the money manager to maintain relationships with multiple brokerage houses for IPO allocations, research, best execution, conference access and other products.
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portfolio. These risk scenarios usually involve a defined set of stress test scenarios, rules allowing risk offsets between the theoretical profit and losses (P&Ls) of these stress test scenarios for products of a common underlier, and offsets between groups of theoretical P&Ls based on correlations.
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As hedge funds proliferated globally through the 1990s and the 2000s, prime brokerage became an increasingly competitive field and an important contributor to the overall profitability of the investment banking business. As of 2006, the most successful investment banks each report over US$ 2 billion
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Each client in the market of a prime broker will have certain technological needs related to the management of its portfolio. These can be as simple as daily statements or as complicated as real-time portfolio reporting, and the client must work closely with the prime broker to ensure that its needs
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Prime
Brokers facilitate hedge fund leverage, primarily through loans secured by the long positions of their clients. In this regard, the Prime Broker is exposed to the risk of loss in the event that the value of collateral held as security declines below the loan value, and the client is unable to
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Prime brokers do not charge a fee for the bundled package of services they provide to hedge funds. Rather, revenues are typically derived from three sources: spreads on financing (including stock loan), trading commissions and fees for the settlement of transactions done away from the prime broker.
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brought substantial change to the marketplace for prime brokerage services, as numerous brokers and banks restructured, and customers, worried about their credit risk to their prime brokers, sought to diversify their counter-party exposure away from many of their historic sole or dual prime broker
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Large prime brokerage firms today typically monitor the risk within client portfolios through house-designed "risk based" margin methodologies that consider the worst case loss of a portfolio based on liquidity, concentration, ownership, macroeconomic, investing strategies, and other risks of the
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in 1949. In the pre-prime brokerage marketplace, portfolio management was a significant challenge; money managers had to keep track of all of their own trades, consolidate their positions and calculate their performance regardless of which brokerage firms executed those trades or maintained those
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Consulting
Services – A range of consulting / advisory services, typically provided to "start-up" hedge funds, and focused on issues associated with regulatory establishment requirements in the jurisdiction where the hedge fund manager will be resident, as well as in the jurisdiction(s) where the
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across several prime brokerages, especially those with strong capital reserves. This trend towards multi-prime brokerage is also not without its problems. From an operational standpoint, it is adding some complexity and hedge funds have to invest in technologies and extra resources to manage the
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The basic services offered by a prime broker give a money manager the ability to trade with multiple brokerage houses while maintaining, in a centralized master account at their prime broker, all of the hedge fund's cash and securities. Additionally, the prime broker offers stock loan services,
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Liquidity penalties may be established using a rule-of-thumb for days-to-liquidate that 10% of the daily trading volume can be liquidated without overdue influence on the price. Therefore, a position 1x the daily trading volume would be assumed to take 10 business days to liquidate.
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For example, a prime broker may also be in the business of leasing office space to hedge funds, as well as including on-site services as part of the arrangement. Risk management and consulting services may be among these, especially if the hedge fund has just started operations.
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different relationships. Also, from the investors' point of view, the multi-prime brokerage is adding some complexity to the due diligence as it becomes very complicated to perform proper assets reconciliation between the fund's administrator and its counterparties.
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The financing and lending spreads, which are charged in basis points on the value of client loans (debit balances), client deposits (credit balances), client short sales (short balances), and synthetic financing products such as swaps and CFDs (
305:. The prime broker provides a centralized securities clearing facility for the hedge fund so the hedge fund's collateral requirements are netted across all deals handled by the prime broker. These two features are advantageous to their clients.
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The prime brokerage landscape has dramatically changed since the collapse of Lehman
Brothers in September 2008. Hedge funds who received margin financing from Lehman Brothers could not withdraw their collateral when Lehman filed for
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Therefore, clients who undertake substantial short selling or leverage represent more lucrative opportunity than clients who do less short selling and/or utilize minimal leverage. Clients whose market activities are principally
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The prime broker benefits by earning fees ("spreads") on financing the client's margined long and short cash and security positions, and by charging, in some cases, fees for clearing and other services. It also earns money by
379:, and then sublease blocks of space to hedge fund tenants. These prime brokers typically provide a suite of on-site services for clients who utilize their space. This is typically called a "hedge fund hotel".
368:– A process whereby the prime broker attempts to introduce its hedge fund clients to qualified hedge fund investors who have an interest in exploring new opportunities to make hedge fund investments.
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due to a lack of asset protection rules (such as 15c3 in the United States) in the United
Kingdom. This was one of many factors that led to the massive
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entails running a series of what-if scenarios that identify the theoretical profits or losses for each position due to adverse market events.
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in annual revenue directly attributed to their prime brokerage operations (source: 2006 annual reports of Morgan
Stanley and Goldman Sachs).
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the margined portfolios of the hedge funds currently serviced and charging interest on those borrowing securities and other investments.
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Advisory
Services – The provision of risk analytic technology, sometimes supplemented by consulting by senior risk professionals.
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In addition, certain prime brokers provide additional "value-added" services, which may include some or all of the following:
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funds. The first non-U.S. prime brokerage business was created by
Merrill Lynch's London office in the late 1980s. After the
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which need the ability to borrow securities and cash in order to be able to invest on a netted basis and achieve an
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repay the deficit. Other forms of risk inherent in Prime
Brokerage include operational risk and reputational risk.
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Upon Lehman's collapse, investors realized that no prime broker was too big to fail and spread their
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by Bank of
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Please help update this article to reflect recent events or newly available information.
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Furman Selz in the late 1970s. However, the first hedge fund operation is attributed to
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are met. Certain prime brokers offer more specialized services to certain clients.
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The following services are typically bundled into the Prime
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managers with portfolio reporting needed to effectively manage money)
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is the generic term for a bundled package of services offered by
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Restructuring transactions in 2008 included the absorption of
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Through the 1980s and 1990s, prime brokerage was largely an
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Office Space Leasing and Servicing – Certain prime brokers
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710:"information supplied by primebrokerageguide.com"
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627:3%–15% up or down price movements used in
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726:. COO Connect. December 2011.
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557:financial crisis of 2007–2008
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825:Fixed income arbitrage
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862:Distressed securities
834:Statistical arbitrage
820:Equity market neutral
815:Convertible arbitrage
549:bankruptcy protection
527:, the acquisition of
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1109:Fundamental analysis
857:Shareholder activism
839:Volatility arbitrage
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635:Margin methodologies
408:Alfred Winslow Jones
366:Capital Introduction
258:Financial regulation
54:improve this article
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52:Please help
47:verification
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18:Prime broker
1258:Hedge funds
1021:Derivatives
1016:Commodities
971:Day trading
881:Directional
780:Hedge funds
643:Rules-Based
377:real estate
375:commercial
299:hedge funds
297:dealers to
273:Super angel
1213:Governance
787:Investment
696:References
546:Chapter 11
352:hedge fund
295:securities
80:newspapers
1147:Investors
797:Arbitrage
433:Citigroup
345:Financing
1293:Category
789:strategy
684:See also
525:Barclays
457:equities
317:Services
1009:Markets
1000:Related
959:Trading
481:updated
394:History
213:Finance
94:scholar
1081:Greeks
1026:Equity
533:Nomura
435:, and
293:, and
187:Trusts
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1124:Short
1114:Hedge
1095:alpha
1002:terms
926:Other
596:Risks
373:lease
195:Terms
101:JSTOR
87:books
1099:beta
1055:Misc
590:repo
571:Fees
507:The
73:news
56:by
1295::
1101:/
1097:/
1083::
935:/
895:/
827:/
559:.
431:,
427:,
423:,
419:,
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1079:(
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772:e
765:t
758:v
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98:·
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